Wednesday, January 30, 2013

Investor sentiment becoming bubbly

On the investor psychology front, the latest AAII investor
sentiment readings were at their most enthusiastic in several months. The percentage of bullish investors was 52%,
an increase from last week’s 44%. This
was also the highest bullish reading since last February 8. The percentage of bears was 24%, a drop from
last week’s 27%.

Bullish readings above 50% often signal market tops, or at least
serve as preliminary warnings that a top is ahead. I would point out, though, that last year’s
(Feb. 8) 52% bullish reading in the AAII poll was followed by nearly two more
months of higher prices in the S&P before a sizable correction occurred.

Along with increasing investor enthusiasm has come an increase in
equity market inflows. CNNMoney pointed
out recently that investors poured a record $8 billion into U.S. stocks at the
start of 2013 after removing more than $150 billion from U.S. stock mutual
funds last year. According to the
Investment Company Institute, the $8 billion investors put back into stocks as
of January 9 was the highest amount within a short space since ICI first began
keeping records in 2007.

As Hibah Yousuf of CNNMoney wrote, “The massive inflow represents
a significant departure from the recent trend of investors fleeing the stock
market.” Along these lines, Art Huprich,
chief technical analyst at Raymond James asks, “Is there a slow yet marginal
shift out of fixed income and into equities taking place?” It’s still early, but it’s beginning to look
that way. Assuming this trend continues
it would certainly jibe with our Kress cycle “echo” forecast for 2013, which
concluded that this year would likely resemble 2007 in many ways.

In other words, 2013 could prove to be a
major topside transition year with some major ups and downs along the way as
investor bullish sentiment reaches a crescendo.